A group of 65 leading US investors with collective assets totaling $7 trillion has teamed up with the European investment management firm, F&C Investment to put a halt to Wall Street financial regulators softening of the rules on tar sands reserves disclosed by oil and gas companies.
The Investor Network on Climate Risk and F&C Investment are concerned that the escalating risks posed by climate change have broad implications for oil and gas companies which could impact their future earnings, and that these risks fall into the category of known trends requiring company disclosure.
At a time when governments around the world are taking an increasingly hard line on carbon pollution, these investor groups feel it is essential that investors be able to assess accurately the risk profile of reported reserves.
As quoted in the UK Guardian, Elizabeth McGeveran, senior vice-president of F&C's governance and sustainable investment team said"Understanding climate risk will assist investors in understanding and evaluating reserves. Regulations already require the disclosure of known trends that companies can reasonably expect will have a material impact on net sales, revenues or income from continuing operations, and we believe that the disclosure of any estimated additional risks posed by the extraction and development of additional reserves will be important."
The SEC had been reviewing the regulations on the way reserves are calculated since 2004, when Shell fell foul of SEC rules and was forced to reallocate a quarter of the assets on its books. The move led to steep fines, the ouster of its chairman and a plunging share price.
Three months ago the SEC changed the rules to allow previously excluded resources such as tar sands to be classified as oil and gas reserves that, as with oil or gas, could be listed as probable, possible and proven reserves.
Previously, tar sands were defined as mining materials, and literally speaking they actually contain no oil in their natural state. Only by heating up the rock to boiling point, can any liquid be extracted. However, such large quantities of heat are required to obtain a usable fuel from the rock means that this is a far less efficient source of energy than conventional oil.
"The energy consumption required to extract a barrel from Canadian tar sands is very different to a barrel of crude from the Gulf of Mexico."said McGeveran. As oil prices rise, companies that use a lot of oil in ratio to the product they sell are obviously far more impacted by price rises. Tar sands mining has an input of 1 unit of fossil energy in for every 3.5 units of energy (their product) out. The lower this ratio, the more the cost of producing oil from shale will rise as fossil energy prices go up.
But mostly, this unusually high carbon method of extraction means that the climate impact of tar sands mining is much worse than that of regular oil and gas. So the move reflects changing attitudes among a very large group of mainstream investors about the impact of commercial activities that could worsen global warming. This group of institutional investors, among them the California Public Employees' Retirement System, Ceres and Parnassus Investments have signed a letter of concern about the tar sands proposals and called for the new carbon implications to be taken into account.
Ceres president Mindy Lubber says that there is a need for financial institutions to evaluate these kind of projects with carbon prices that reflect their true long-term costs once carbon-reducing regulations take hold around the world.
"Much of the problem is our reliance on outdated accounting systems. Our economy uses accounting systems that are precise in measuring capital goods and profits, but weak in measuring natural and human resource impacts. This narrowly-defined accounting system means that companies are often able to "externalize" natural resource costs. In other words, they can emit global warming pollution for free without paying for environmental damage. Society and taxpayers shoulders these costs instead."
We're now seeing the capital markets begin to incorporate the external costs of global warming, especially in Europe where government-supported trading systems and pricing mechanisms for every ton of carbon dioxide emitted have fostered a $30 billion a year carbon emissions trading program. "
Photo S. Jocz